In This Article:
Stocks in Translation podcast host Jared Blikre outlines a brief history of share buyback programs.
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Lots of bullishness in the market today with the latest tariff détente, but here's another bid on stocks that has reasserted in recent weeks, as we climbed out of earnings season, and that is stock buybacks. I'm Jared Blikre, host of Stocks to Stocks in Translation, and today we're going to take a closer look at companies buying back their own stock. Now, let's talk cash. What do companies do when they've got extra dough sitting around? A big slice of that goes to buybacks. That's right. Companies shopping for their own stock makes up about 40% of their spending. And another chunk, about 30%, goods goes to good old fashioned CapEx. That's capital expenditures, building factories, upgrading tech, basically growing the business. Then shareholders, they get a nice 25% slice directly through dividends, and the leftover 5%, that goes to debt paydowns, M&A deals, stashing cash for rainy days. Now, here is the headline. 2024 was an absolute blowout year for buybacks. Companies in the S&P 500 executed a record $943 billion in repurchases. That's up almost 20% from the year prior. Total shareholder returns, and that is buybacks plus dividends, it hit a juicy record of over $1.5 trillion. So, who is leading the spending spree? Big tech, of course. Tech giants shelled out over a quarter, about 27% of all buybacks, spending a cool $253 billion. Big banks and finance, they weren't shy either, coming in next with nearly $175 billion. Even sleepy consumer staples companies practically doubled their buybacks in a single year. Now, zooming in, some of these buybacks are very concentrated at the top. The top 20 largest companies alone made up nearly half of all repurchases. King of the Hill, King Apple, spending over $104 billion last year. And for context, Apple has spent $700, $716 billion on buybacks over the last decade. Meta and Nvidia, they also dialed up their programs with Nvidia more than tripling spending. So, it seems that going big might be the new normal. But why buybacks? Two words: Earnings Engineering. Companies love buybacks because they shrink share counts and fewer shares outstanding, that boosts earnings per share, EPS, making the numbers look great. It's also handy if you're paying your team in stock, because buybacks offset that dilution. Last year, about 12% of the S&P 500 companies reduced their share counts meaningfully. Now, here's a twist. Companies cannot always buy back their own stock. Most have to pause around buybacks around earnings season. And this creates what's called the buyback blackout window. Typically, 75% of S&P 500 companies sit on the sidelines during peak earnings week, removing a critical market support support right when volatility tends to spike. Now, the chart shows the increasing number of companies emerging out of that window right now. But keep an eye on the VIX when the next season is approaching. Oh, and speaking of policy twists, remember that 1% buyback tax that was thrown into the inflation Reduction Act of 2023. Congress is debating bumping it up to 4%. So that could also shake up next year's buyback schedule as well.